Suppose the marginal propensity to consume equals 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, real GDP will _____ by _____.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, an increase in investment spending by $50 billion will increase real GDP by $50 billion * 10 = $500 billion.

Suppose the Marginal Propensity to Consume Equals 0